What types of excess returns do active investors pursue?

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Hey, that's a great question — it gets straight to the heart of active investing. Simply put, the "excess return" that active investors pursue has a specific name in the investment world: Alpha (α). It might sound technical, but don’t worry. Let me explain it plainly with an analogy.

Think of It Like an Exam

Imagine the entire stock market as a classroom, and all the stocks are the students in it.

Market Average Return (Beta β): This is like the class’s “average score.” If you don’t want to overthink it, buying an index fund (like the SSE 300 Index Fund) is like "playing it safe" — your goal is to match the class average. If the market rises 10%, you gain 10%; if it falls 5%, you lose 5%. This return, earned by simply riding the market tide, is called Beta (β) return. It’s “a rising tide lifts all boats” money. Earning it doesn’t mean you’re exceptional — you’re just in the market.
Excess Return (Alpha α): This is the “extra credit” you earn through “individual effort.” You don’t want just the average score. You believe some classmates (stocks) are underestimated by the teacher (market) and have huge potential, while others are overrated and will eventually be "exposed."

So you start your homework:

Deep Research: You thoroughly study each classmate’s homework, class performance, and even extracurricular activities (e.g., analyzing company financials, industry outlook, management teams).
Buy Low, Sell High: You befriend the "late bloomers" (buy low) before others notice them and step away (sell high) when they become popular star students.
Risk Avoidance: You predict which "troublemakers" might drag down the class average and actively avoid them (sell or avoid shorting overvalued stocks).

Through these efforts, your final score surpasses the class average. For example, if the class average (market return) is 10%, your hard work gets you 15%.

That extra 15% – 10% = 5% is your Alpha (α) return!

To Summarize

So what do active investors pursue?

They aren’t satisfied with just following the market’s Beta (β) return. They believe that through their own intelligence, research, and strategy, they can outperform the market and earn that hard-won Alpha (α) return — the part entirely independent of market volatility and the true test of individual skill.

This is why masters like Benjamin Graham (author of The Intelligent Investor) devote tremendous effort to analyzing companies’ intrinsic value, hunting for undervalued “cigar butt stocks.” Their entire pursuit boils down to capturing that rare and precious “Alpha.”

Of course, capturing Alpha is incredibly hard. Just as it’s rare for students to consistently rank first in class, many active investors end up underperforming the “play-it-safe” average after fees (or even losing more) — which is why active investing remains controversial.

Hope this helps!